1. 12.09.2013.
Address by Prime Minister Valdis Dombrovskis at the Euro Conference – Latvia.
Ladies and Gentlemen,
Welcome to Latvia and Euro Conference – Latvia!
On 1 January 2014, Latvia will become the 18th
euro area member state. It will become the
first euro area country that has been successful in overcoming the state financial and
competitiveness crisis under conditions of a fixed exchange rate. Thus Latvia has not only
fulfilled the Maastricht criteria but also demonstrated its ability to deal with the same
problems now plaguing a number of euro area countries.
In a week, it will be 10 years since the Latvian people voted in a referendum to join the
European Union: two thirds of the voters then supported joining the EU, which demonstrated
unequivocally and clearly that the population supports Latvia's integration with the European
Union. In these past ten years, we have managed to learn from our mistakes, gain experience
and strengthen Latvia's international presence – the most important contribution in that regard
was made by Latvian entrepreneurs who have managed to establish brands recognized in
Europe and elsewhere in the world.
As a result of its structural reforms, Latvia is currently among the countries with the greatest
potential of growth in the EU. As the European Commissioner for the budget Mr
Lewandovsky just noted, the Directorate of Monetary and Economic Affairs of the European
Commission has ranked Latvia among the four countries of Central and Eastern Europe with
the greatest potential for growth and convergence by 2022. That is confirmation of our
achievements in straightening out our economy and creating conditions favourable for
growth, where euro introduction plays an essential role
Latvia is joining the euro area at a time when the latter is experiencing the deepest crisis in its
history. It is no surprise that the question I am asked most often is why Latvia has chosen this

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particular moment to join. If ten years ago the euro area was an exclusive club that everyone
wanted to join, nowadays countries proceed with much more caution. And it is
understandable: the euro area crisis that has lasted already four years has given rise to much
doubt and scepticism regarding the monetary union.
To answer the question of why Latvia chose this very moment to join, however – there were a
number of practical considerations. Yet I would like to stress something else: in such
situations, it is important to be able to distinguish between short-term instability from long-
term trends. The current crisis, albeit unpleasant, is a natural part of a tighter economic
integration process.
Because the conditions of global competition, countries will have to form ever closer mutual
economic ties; regional economic integration is an essential precondition for their
competitiveness in the future. This particularly applies to small countries and it is particularly
important in Europe where there are many relatively small countries. It is very hard to
imagine how a fragmented Europe, with dozens of small currencies and different strategies
for increased competitiveness, could successfully compete in the future. And because the
future of Europe is unimaginable without the euro area, it is in Latvia's interest to become a
part of the monetary union, thus substantially improving its long-term chances for economic
growth.
But just as important as to distinguish fluctuations from tendencies is to realize that a tighter
economic integration is just a precondition for competitiveness and that in and by itself it is
no guarantee of success. Concerning the current crisis, we therefore have to admit that it is
fundamentally a crisis of competitiveness.
The extra attention that Latvia receives now that it is poised to join the euro area, will once
again serve to remind the world of the actual reason for our success. It was not austerity
policy but the straightening of state finances and structural reforms that allowed us to regain
competitiveness. I hope that our experience will serve to inspire and push forward long since
needed reforms at the EU level.
First, it involves establishing a banking union. It is an essential precondition for the euro area
to be able to return to healthy growth. The weak balances of euro area banks prevent them
from resuming lending. Without lending, resumption of stable growth is not likely.
Formation of a banking union would cut the noose of mutual dependence of weak banks and
countries suffering under burdens of debt.

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Second, speaking of increasing our long-term competitiveness, we are planning to actively
support the faster implementation of such initiatives essential for European competitiveness
as the establishment of a digital single market, completion of single market for services as
well as signing free trade agreements with the USA and other partners. A full implementation
of these initiatives would provide additional growth in the amount of 7% of GDP. At a time
when most of the euro area countries are stagnating or experiencing growth that does not
exceed 1% of GDP, introduction of these initiatives would ensure resolving the crisis as well
as much more favourable conditions for further growth in the EU. I would like to note that
expanding and perfecting the digital single market will be one of the priorities of Latvian EU
presidency in 2015.
Much has already be said about the many concrete economic benefits that adopting the euro
will bring: a more stable financial environment, lower interest rates, lower trade costs and
simply a more comfortable life. However essential these benefits, they will not by themselves
raise Latvia's prosperity in the longer term. That is why it is not wrong to say that euro
introduction is no magic wand and that it does not mean that the work is over.
These benefits in and of themselves do not free us of the need to continue to take measures
that would increase our competitiveness and raise our prosperity level in the long term.
The most important challenges for Latvia's competitiveness in the near future will be
increasing the role of the exporting sector in Latvian economy and narrowing the inequality
gap.
Since it is a rise in productivity that will be the main source of increased prosperity for the
population, it will be particularly important to ensure an increased proportion of
manufacturing and other exporting sectors in our economy. It is these very sectors where the
potential for productivity growth is the greatest. Concentrating our resources in support of the
industries that are capable of producing and granting services with a high value added is the
most effective way to raise the overall prosperity level in the country.
Secondly, we should pay attention to the high inequality as an important factor that has a
negative impact on Latvia's competitiveness. Latvia is among the countries with the highest
inequality of income in the EU and this fact has merited a special emphasis in the 2011
evaluation report regarding Latvia's competitiveness. The high inequality prevents Latvia
from fully using its growth potential. Consequently, reduction of inequality has been set as
one of the goals in the National Development Plan. Addressing this problem, the bulk of
resources in the post-crisis period has been concentrated on reducing inequality. Much work

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is being done to relieve the tax burden of employees, raise the minimum wage and raising the
lower salaries in the public sector. Means have likewise been allotted to raise the quality of
healthcare as well as to improve various social services, thus improving the quality of life of
the least protected part of the society.
In the context of next year's budget, an agreement has been reached to raise the minimum
wage to LVL 225 (EUR 320), relief for dependents to LVL 136 (EUR 193.51 and the untaxed
minimum to LVL 54 (EUR 76.83).
Reducing inequality is not an issue to be solved through one budget, however. If we really
want to have a more equal society in ten years, we will have to invest in education and
healthcare, implement employment stimulating tax policies as well as continue to
incrementally raise the minimum wage
Just as, without any rational reason, the turn of the year often seems to serve as a point of
reference for getting rid of bad habits or starting a new life, introduction of the euro tends to
be considered in part as an opportunity to begin a new period in Latvia's development,
symbolically closing the post-crisis or recovery period.
Yet there is some rational reason why euro introduction could stimulate the beginning a new
era in Latvia's development. The experience of the crisis and post-crisis periods has led us to
several essential conclusions that will be particularly useful to us in the euro area. This
experience has changed our understanding of how a country achieves prosperity and on what
it should be based – i.e. an increase in real wages supported by increased productivity; budget
expenditures that do not exceed revenues and a resolve to always observe these rules.
It is my great hope that the introduction of the euro will serve Latvia as a springboard for a
higher quality and more inclusive growth in the future.
Additional information:
Mārtiņš Panke
Prime Minister's Press Secretary
Tel.: +371 67082865, +371 26556965
E-mail: Martins.Panke@mk.gov.lv